Setting Incentives: Temporary Performance Premiums Versus Promotion Tournaments
AbstractTwo alternative relative compensation schemes are compared with respect to total output that can be generated at a given sum of salaries. While the promotion regime guarantees that any salary increase is permanent, the premium system allows a reduction in the income of an agent to the base salary after one period. It is shown that the optimum promotion tournament system induces a higher total output than the optimum premium system. This result occurs because a promotion regime allows distortion in a contest in favor of winners of previous contests.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 432.
Date of creation: 2001
Date of revision:
Tournament; relative compensation; internal labor markets;
Other versions of this item:
- Volker Meier, 2004. "Setting Incentives: Temporary Performance Premiums versus Promotion Tournaments," LABOUR, CEIS, vol. 18(4), pages 661-674, December.
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